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Resurgent Pershing bets big on Buffett and defends 25% gearing

16 August 2019

Bill Ackman looks to build on his portfolio's 57% return this year with a sizeable stake in Warren Buffett's Berkshire Hathaway.

Bill Ackman has snapped up a stake in Warren Buffett's Berkshire Hathaway (BRKa.N) as the US activist hedge fund manager looks to build on a resurgent 2019 for his Pershing Square Holdings (PHSP) investment trust.

Ackman revealed the investment in legendary investor Buffett's conglomerate, accounting for approximately 11% of portfolio assets, in half-year results.

'The catalyst for our current investment in Berkshire is our view that the company is trading at one of its widest discounts to its intrinsic value in many years, at a time when we expect the operating performance of its subsidiaries to improve,' he said.

The 'Sage of Omaha' has trounced the stock market return in his decades as an investor, but since the financial crisis, shares in Berkshire Hathaway have trailed the S&P 500. In 2019, shares in the investment vehicle have fallen 2.6% while the S&P 500 has rallied 13.6%.

But Ackman said the common view of Berkshire Hathaway as 'akin to an investment fund' was wrong, arguing much of its value lay in the insurance business Buffett had built.

'Today, Berkshire is a $500 billion market cap holding company with about half of its value residing in its insurance subsidiaries, and the balance in controlling stakes in highly diversified operating companies,' he said.

Ackman pointed to Berkshire's 'extraordinary' record in growing its float, the premiums held to pay for insurance losses.

'The world's greatest insurance architect'

'While Buffett is best known as a great investor, he should perhaps also be considered the world's greatest insurance company architect and chief executive because the returns Berkshire has achieved on investment would not be nearly as good without the material benefits it has realised by financing these investments with low-cost insurance float.

'We believe that Berkshire should continue to generate high returns for shareholders from the current stock price even if the investment returns from the company's large cash holdings and marketable securities portfolio are similar to that of broad market indices.'

Ackman is hoping to build on a strong 2019 for his trust, whose shares have rallied 44.9% in 2019, recovering some of the ground lost during a torrid start to life after its 2017 London stock market debut.

That share price return lags the 57.4% net asset value return (NAV), as the stock's discount to NAV has widened to 30.2%.

Chief contributor to those resturns has been the major rally in the shares of Chipotle Mexican Grill (CMG.N), up 88% this year and a position that has now grown to 18.8% of Pershing Square's concentrated portfolio.

Ackman defended the trust's heavy use of borrowing, after issuing 20-year debt last month, a move branded 'outrageous' by Asset Value Investors, which holds over 3% of the trust's shares, the bulk of which in its AVI Global (AGT) trust. Pershing Square's gearing now stands at 25% of NAV.

'Pershing Sqaure Holdings remains conservatively financed as out highly liquid portfolio is principally comprised of publicly traded, large capitalisation, investment-grade US equities, and our net debt is currently covered by our investment assets 22 times.'

'We believe that the ability to access a modest amount of low-cost, long-term leverage without margin-leverage-like covenants will enhance Pershing Square Holdings' long-term rate of return without meaningfully increasing the risk to shareholders.'

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